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Andreas Zanin
Analysis | November 12, 2020

Forex market outlook: EURO and correlations

FX Market Outlook – EUR and EUR Correlated Currencies Low Volatility to End?

Analysis EUR/USD, USD/NOK, USD/SEK, USD/CZK

12/11

We have seen low volatility this week in euro and euro correlated currencies, but we think the USD could mount a rally. The USD has limited downside in our view against the EUR, SEK, NOK and CZK (charts below) and we are looking for a rally. The logic of the trades and charts below.

In terms of the USD, the market remains heavily bearish the USD. Sentiment Traders USD pessimism Index is at a 10-year high and speculators remain heavily short. The market point to rising virus cases in the US as a big negative fundamental but there also on the rise in euro zone as well.

The virus is spreading fast in Euro zone and the total number of cases registered in Italy since the start of the pandemic moved above the one million mark yesterday, with 32,961 new cases recorded in the past 24 hours. The zone is partially locked down through to the end of November, but we could easily see extensions into the Christmas period which will of course impact on the economy and the ECB are concerned.

ECB President Christine Lagarde warns against vaccine optimism and hints at more ECB easing. “The recovery may not be linear, but rather unsteady, stop-start and contingent on the pace of vaccine rollout.” (CNBC)

Lagard noted yesterday that the central bank will probably cut borrowing costs for banks further, as well as adjusting its pandemic asset purchase program. When asked about the possibility of cutting interest rates even further, she noted:

“We wouldn’t want to exclude any measure going into December.” They will cut and add to stimulus – it won’t help the economy but will help cap euro strength. In terms of bond yields, they now favour the US over euro zone and other USD negatives such as Biden election win etc are discounted in the price.

The market volatility, for now, is low but this might be about to change key levels of support and resistance to watch on charts below.

Technical Analysis

EUR/USD DAILY CHART: We have traded in a channel since August – The top of the channel is holding at 1.1900 and any rallies back to the top of the channel are a sell in our view – We are below 1.1800 and if we can sell off through yesterday’s low, we expect a test of the key 1.1600 level. – if this were to break, we would expect a significant sell off down to 1.1200.

USD/NOK Daily Chart: We have held support at the 9.00 level after the recent sharp selloff and now expect an upside breakout to target recent highs.

USD/SEK Daily Chart: After trading at a new daily low on Monday we recovered back above support and have seen low volatility – If we were to breakout to the upside we would expect a move up to recent highs.

USD/CZK Daily Chart: After a big correction last week we are holding nearby support, volatility has dropped and we think selling pressure is exhausted If we break above resistance we expect a move up to recent highs.

 

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